Q: I understand that for 2010 there is a provision that allows for the conversion of a Traditional IRA to a Roth IRA without income limits. Can you shed some light on this?
A: Beginning January 1, 2010, the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) allows for the conversion of a Traditional IRA to a Roth IRA without any income restrictions. This is significant, particularly for those with a modified adjusted gross income (MAGI) greater than $100,000 who previously were excluded from many Roth IRA benefits. It’s also very compelling to convert a non-deductible IRA. However, there are a few important points to consider before converting.

The most important one is taxes. Any conversion amount is a taxable event that will add to your taxable income. If you convert in 2010, you may spread the tax over two years – 2011 and 2012. Conversions outside 2010 require all taxes to be paid the next year. Further considerations include assessing whether your tax rate will be higher or lower when you retire than it is now. Also, what will be your funding source for tax payments? If your retirement account is the only fund for your taxes, you may want to think long and hard before making a conversion despite many of the benefits.

Please remember that you can convert any Traditional IRA from another company into a No-Fee FAM Funds Roth IRA. As always, I highly recommend including your accountant or tax preparer in the final decision!

Q: I want to rollover my 401(k) plan to FAM Funds. My employer is offering me early retirement next year when I turn 55. The company told me that I can take the distribution as a lump sum. Do you have a recommendation? Are there any issues I should be aware of?
A: Yes. A direct rollover of a 401(k) to a FAM Funds Traditional IRA is a nice option because it allows you to avoid both the 10% early distribution penalty and any federal income tax. However, if you take money from your IRA before 59 ½, with a few exceptions, you will incur the 10% early distribution penalty. So, if your intent is to move your 401(k) into an IRA and not touch it until you’re in your sixties, then a direct rollover is a valid option.

Q: Given the current market conditions, is now a good time to convert my Traditional IRA into a Roth IRA?
A: First, a conversion is when you move assets from a Traditional IRA into a Roth IRA; it is an intentional, taxable event. When you take advantage of this option, you pay income taxes today on 100% of the pre-tax dollars you convert. Once the taxes are paid, income taxes may never be due on appreciation or subsequent withdrawals. I say “may” because certain requirements must be met to maintain the tax-free status. This includes not touching the assets for five years from the conversion date along with one of four other criteria.

Second, a conversion may not be right for everyone, but everyone who is eligible should understand its benefits. A silver lining resulting from the market downturn is that since your account may have declined in value, you pay taxes on a lower amount now instead of on a larger amount later. One of the limitations is that if your modified adjusted gross income (MAGI) is greater than $100,000, you cannot convert.

There are more details to consider so please contact us to discuss converting to a FAM Funds Roth IRA. We recommend including your accountant or tax preparer in the final decision.

Q: Is a 2008 IRA contribution made via mail and postmarked on or by April 15, 2009, but received after that date, considered on-time?
A: Yes, under IRC Sec. 7502(a) any payment that must be made by a specific date under IRS laws and is delivered by the U.S. Postal Service after the date, is deemed made on the postmarked date. It is recommended that financial organizations accepting contributions after the deadline — Place the envelope bearing the postmark in the investor’s file; Contact the customer to confirm the tax year for the contribution.

Q: May Traditional IRA contributions be made after age 70½?
A: Yes, in three instances — When an employer funds a SEP they must contribute for eligible employees over 70½; When accepting qualified transfers or rollovers. However, you should not rollover required minimum distributions; When making carry back contributions (made between January 1 and April 15 of the previous tax year) provided you are eligible to do so.

Q: Is there an income requirement for making Traditional IRA contributions?
A: Basically, a person just needs earned income from personal services rendered to meet the requirement. The IRS defines this as any amount listed in the Form W-2 (Wage and Tax Statement) “Wages, Tips, Other Compensation” box less the total shown in the “Nonqualified Plans” box. Please Note: IRA Publication 590 indicates that taxable alimony and separate maintenance payments are also eligible for contributions.

Q: How many Traditional IRAs may a person have?
A: An investor may have more than one Traditional IRA, but once they sign one set of opening documents and make subsequent contributions under the same plan agreement, only one Traditional IRA exists. If an individual has multiple IRAs, they must combine annual contributions to monitor specified maximum yearly contribution limits.

Q: May a self-employed IRA investor contribute to a Traditional IRA if they also contribute to a SEP?
A: Yes, if they are under age 70½ and have eligible earned income. Please Note: Contributing to a SEP makes the person an active participant in an employer-maintained retirement plan during those contribution years. Consequently, the IRA contribution may not be fully deductible depending upon the investor’s modified adjusted gross income (MAGI).

Q: How often should I review my IRA beneficiaries?
A: You should review both your primary and contingent IRA beneficiaries annually. Perhaps you have had changes in your relationships such as a wedding, the death of a loved one, or a divorce. As the IRA distribution process occurs following your death, if the primary beneficiary is alive, your account will go to them. If your primary beneficiary predeceases you, the IRA is distributed to the contingent beneficiary. If you have not assigned a contingent beneficiary, then it goes to your estate.

If your situation has changed, there may be unintended consequences from your beneficiary designations. For example, your IRA could be paid to your ex-spouse or current spouse instead of your children. Also, a later born child may not be named as a beneficiary. Additionally, there can be negative tax consequences if your IRA goes to your estate instead of your spouse or other beneficiaries. Please Note – This applies to these retirement accounts: Traditional, Roth, SEP, SIMPLE, Individual(k), and 403(b)(7).

Q: How can I change the beneficiary on my IRA?
A: To change the beneficiary designation on your retirement account, you must complete a Change of Beneficiary Form and return the form to our office. Change of Beneficiary Forms can be accessed under Shareholder Services – Applications & Forms.

Q: May an active participant in an employer-sponsored Qualified Retirement Plan (QRP) make a Traditional IRA regular contribution?
A: Yes, if they are younger than 70½ and have earned income. However, an investor’s status as an active participant in a QRP, such as a 401(k), may limit the tax deduction from the Traditional IRA contribution. A person’s Form 1040 tax filing status and modified adjusted gross income (MAGI) factor into determining the deduction.

Q: May a person with an IRA title their account in the name of their living trust?
A: No, IRAs are only for an individual’s benefit. An IRA is a person’s trust with a financial organization typically acting as the trustee of their assets. However, a living trust may be named as the beneficiary and upon death of the holder the IRA is paid into the trust and the assets are distributed according to the provisions.